Prepaid or contract?

It’s easy to fall in for an advertisement claiming you can get a state-of-the-art phone for $99, or sometimes even free. It feels even better when you go see a dealer and they tell you they can get you a contract for only $20 a month. The surprise usually comes when you get the first bill after a month, and the amount is quite a bit more expensive. Unexpected contract charges is the number one complaint from cellphone users. This is not to say contracts are all evil, in fact most cellphone users in North America are using contracts, although they are less common in other parts of the world. Lets see what pitfalls to avoid with contracts and prepaid, and which choice is best for which customers.

The way providers work is simple. They get a deal with a phone manufacturer to get a phone branded with their name. They customize the phone, then they sell the phone through their dealers at various prices. They sell it at the full price if you intend to go with prepaid, or they will give you big rebates if you agree to sign a contract, since they know they will make more money from you during the contract time. For example, the Nokia 5300 from Rogers Wireless will cost you $229 if you buy the phone without contract. If you agree to a 1 year contract, it will cost $179. $129 on 2 years, and $79 on 3 years. So as you can see the rebate can be big.

When looking at the actual monthly fee, the biggest difference is the included features and the unexpected fees. With prepaid, you go out every month and buy a prepaid card (or call in to add money with a credit card, or online) and the money you spend is what you get as far as airtime. There are no added fees, and there’s several features included. For example with Rogers Wireless, you can buy a $10 card and get 30 minutes of airtime, with call display and voice mail included. For a contract, a $20 plan will give you 150 airtime minutes. However to get the voicemail and call display you need to add $10. Plus, contracts add a $6.95 monthly access fee, and $0.50 911 fee. This means the $20 contract will actually costs you $37.45, plus taxes. You still get more airtime for the amount, but you have to be careful about such hidden fees.

The story is the same for all providers. For example on Verizon Wireless, their prepaid service includes voice mail and call display. Their plans also include both, however their lowest individual contracts start at $39 for 450 minutes, plus fees, taxes and surcharges. One thing to note is that most providers allow you to use any phone you may own with prepaid. Others will only sell you a few phones for prepaid, especially CDMA providers.

For data, fees usually change between plans and prepaid. For example on Rogers Wireless, there are data packs that can be added to a contract and provides free data usage including a small download size. You can spend $7 per month for 1 MB of download, with $0.02 per KB after that. On prepaid, it will cost you $0.05 per web page, regardless of the size. So for data usage, prepaid will be a much better choice in this case.

The general rule is that plans will usually be the best choice for people using their phones a lot for voice calls. You can get a large number of airtime minutes for a lower price than if you used prepaid. However, with a plan, you usually need to pay for each additional feature, plus there’s often hidden fees. Also if you don’t keep track of how much you use your phone, you will end up with a big surprise at the next bill. Remember that if you want to cancel your plan before the term is over, you will be charged a very large early cancellation fee. Also most plans will require a credit check, and a lot of personal information, which is not required for prepaid.

Prepaid is usually better for low voice usage, for people wanting an emergency phone, or for those who want to keep control of their service. There’s often features that you get for free on prepaid, and there is no hidden fee. If you want to pay the least amount per month this is the way to go. However remember you will not get access to the rebates on phones so you will pay the phone full price, and you won’t get a lot of airtime for your money. Also note that providers will usually let you switch your prepaid service to a contract should you wish to, for free or for a little fee. The final advice really, is to investigate fully before deciding anything, because each provider has a very large small-print page.